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Subject: Trust Income

Question

Will the total net income of the Trust be included in the assessable income of the Taxpayer under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Taxpayer is a public company limited by guarantee, incorporated in Australia and is not under ant legal disability.

The Taxpayer proposes to: establish a new trust (the Trust).

In respect of the beneficiaries the proposed trust deed contains clauses that lists the Taxpayer as the beneficiary. The trust deed allows for other beneficiaries to be added with the consent of the Taxpayer. It also explains how the trustee can distribute income to beneficiaries.

The Taxpayer is also the listed beneficiary of another trust with similar clauses regarding beneficiaries and income distribution.

All of the net income the Trust for each income year will be distributed to the Taxpayer.

Relevant legislative provisions

ITAA 1936 Section 97

ITAA 1936 Division 6

ITAA 1936 Division 6E

Income Tax Assessment Act 1997 (ITAA 1997) Subdivision 115-C

ITAA 1997 Subdivision 207-B

Reasons for decision

Summary

Section 97 of the ITAA 1936 will apply to include any net income of the Trust as assessable income of the Taxpayer.

However Division 6E of the ITAA 1936 will apply in respect of any net capital gains and franked distributions that may form part of that net income.

Detailed reasoning

Subsection 97(1) of the ITAA 1936 states:

Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and

(b) the exempt income of the beneficiary shall include:

(i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and

(c) the non-assessable non-exempt income of the beneficiary shall include:

(i) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

In brief, section 97 of the ITAA 1936 provides that a resident beneficiary shall include in their assessable income all the income of a trust estate to which they are presently entitled, providing that resident is not under a legal disability.

The terms 'resident' or 'resident of Australia' is defined in section 6(1) of the ITAA 1936 and paragraph (b) states:

a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

The Taxpayer is not under a legal disability and as it was incorporated in Australia it is a resident. Therefore the Taxpayer will have to include in its assessable income so much of the net income of the trust estate that is attributable to it.

To work out how much of the income is attributable to the Taxpayer we need to look at the trust deed and any action taken by the trustee in respect of the distribution of income as allowed by that deed.

In the trust deed the Taxpayer is listed as the beneficiary and the deed allows the trustee to distribute income to other beneficiaries (if any are included).

Although beneficiaries can be added all of the net income of the Trust for each income year will be distributed to the Taxpayer which means that section 97 of the ITAA 1936 will apply to include all of that net income as assessable income of the Taxpayer.

Note:

For the 2010-11 and later income years, Division 6E of the ITAA 1936 will have an effect on the application of section 97 of the ITAA 1997. How Division 6E effects section 97 of the ITAA 1936 is explained in Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions (issued 28 March 2012).

Paragraphs 1 to 5 of TR 2012/D1 (under the heading What this Ruling is about) state:

This ruling is about the meaning of the expression 'income of the trust estate' as used in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and related provisions. Division 6 contains rules for assessing the net income of a trust calculated under section 95 (referred to in this ruling as the trust's 'net income').

Prior to the 2010-11 income year, a resident beneficiary of a trust estate who was presently entitled to a share of the income of the trust estate and not under a legal disability was assessed under section 97 on that same proportionate share of the entire net income of the trust estate. Section 98 operated in a similar manner to assess the trustee on behalf of certain beneficiaries who were presently entitled to income of the trust estate but were under a legal disability or were non-residents at the end of the income year; and certain beneficiaries who were deemed by subsection 95A(2) to be presently entitled to income of the trust estate. If there was some net income not assessed to or in respect of any beneficiary, then the trustee was generally assessed on that net income under section 99 or section 99A.

For the 2010-11 and later income years, capital gains and franked distributions included in the net income of a trust are brought to tax in accordance with Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 (ITAA 1997) respectively.

The balance of the net income (that is the net income excluding capital gains and franked distribution) of the trust is still assessed under Division 6 in the manner described in paragraph 2, but modified by Division 6E of Part III (Division 6E).

Division 6E adjusts the rules in Division 6 to ensure that capital gains and franked distributions are not taxed twice (that is, as a result of Subdivisions 115-C or 207-B of the ITAA 1997 and Division 6). In broad terms the effect of Division 6E is to apply Division 6 on the assumption that net capital gains and franked distributions are excluded from the trust's net income, and any amount relating to these things is excluded from the income of the trust estate.

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